PROLOGIS TRUST - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 01-12846

PROLOGIS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND 74-2604728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

14100 EAST 35TH PLACE, AURORA, COLORADO 80011
(ADDRESS OR PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(303) 375-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

PROLOGIS TRUST
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.

Yes [X] No [ ]

The number of shares outstanding of the Registrant's common shares as of
August 8, 2002 was 177,938,883.

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PROLOGIS

INDEX

2

PROLOGIS

CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated
condensed financial statements.

3

PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated
condensed financial statements.

4

PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

See Note 8 for information on non-cash investing and financing activities.

The accompanying notes are an integral part of these consolidated
condensed financial statements.

5

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)

1. GENERAL

Business

ProLogis, collectively with its consolidated subsidiaries and partnerships,
is a publicly held real estate investment trust ("REIT") that owns, operates and
develops industrial distribution properties in North America (the United States
and Mexico), Europe and Asia (Japan). The ProLogis Operating System(R),
comprised of the Market Services Group, the Global Services Group, the Global
Development Group and the ProLogis Solutions Group, utilizes ProLogis'
international network of distribution properties to meet its customers'
distribution space needs globally. ProLogis' business consists of three
reportable business segments: property operations, corporate distribution
facilities services business ("CDFS business") and temperature-controlled
distribution operations. See Note 7.

Principles of Financial Presentation

The consolidated condensed financial statements of ProLogis as of June 30,
2002 and for the three and six months ended June 30, 2002 and 2001 are unaudited
and, pursuant to the rules of the Securities and Exchange Commission, certain
information and footnote disclosures normally included in financial statements
have been omitted. While management of ProLogis believes that the disclosures
presented are adequate, these interim consolidated condensed financial
statements should be read in conjunction with ProLogis' December 31, 2001
audited consolidated financial statements contained in ProLogis' 2001 Annual
Report on Form 10-K, as amended.

In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of ProLogis'
consolidated financial position and results of operations for the interim
periods. The consolidated results of operations for the three and six months
ended June 30, 2002 and 2001 are not necessarily indicative of the results to be
expected for the entire year. Certain of the 2001 amounts have been reclassified
to conform to the 2002 financial statement presentation.

The preparation of consolidated condensed financial statements in conformity
with generally accepted accounting principles ("GAAP") in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Interest Expense

Interest expense recognized after capitalization was $81.0 million and $82.2
million for the six months in 2002 and 2001, respectively. Amounts capitalized
for the six months in 2002 and 2001 were $10.4 million and $12.4 million,
respectively. Amortization of deferred loan costs included in interest expense
recognized was $2.5 million and $2.4 million for the six months in 2002 and
2001, respectively. Total interest paid in cash on all outstanding debt was
$89.9 million and $92.7 million for the six months in 2002 and 2001,
respectively.

Recently Adopted Accounting Standards

On January 1, 2002, ProLogis adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".

SFAS No. 142 provides that goodwill is no longer subject to amortization
over its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test. The
impairment guidance in existing rules for equity method goodwill will continue
to apply. ProLogis has goodwill balances in all three of its operating segments.
Accordingly, ProLogis assessed its goodwill balances for impairment as of
January 1, 2002, the date of adoption. In accordance with the

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provisions of SFAS No. 142, this assessment occurred during the first six months
of 2002. No transitional impairment adjustment to ProLogis' goodwill balances
was required as a result of this assessment. SFAS No. 142 also requires that
goodwill be assessed for impairment at least annually after the initial
assessment is performed. ProLogis performed an assessment of the goodwill
balance recorded in its CDFS business segment as of June 30, 2002. Goodwill in
the property operations segment and the temperature-controlled distribution
segment will be assessed before the end of 2002. As a result of the assessment
of the CDFS business segment goodwill balance, no impairment adjustment was
required.

Other provisions of SFAS No. 142 changed the guidance for recognition of
acquired intangible assets other than goodwill. However, amortization of
intangible assets over their useful lives does continue. ProLogis and its
unconsolidated entities do not have any acquired intangibles other than
goodwill. Had SFAS No. 142 been applicable in 2001, ProLogis' net earnings
attributable to Common Shares would have changed as follows (in thousands except
per share amounts):

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(1) Also, includes ProLogis' share of the goodwill amortization expense
recognized by its unconsolidated entities.

SFAS No. 144 establishes a single accounting model for long-lived assets to
be disposed of by sale and provides implementation guidance with respect to
accounting for impairment of long-lived assets. In management's opinion,
ProLogis' long-lived assets are not carried at amounts in excess of their fair
values. Also, SFAS No. 144 requires that discontinued operations be measured at
the lower of carrying amount or fair value less cost to sell, similar to the
basis used for other long-lived assets, rather than at net realizable value as
previously required. Additionally, future operating losses of discontinued
operations are no longer recognized before they occur. Under SFAS No. 144, the
properties sold by ProLogis to third parties are considered to be discontinued
operations unless such properties were developed under a pre-sale agreement.
However, properties contributed to entities in which ProLogis maintains an
ownership interest are not considered to be discontinued operations under SFAS
No. 144 due to ProLogis' continuing involvement with the property. Properties
disposed of by ProLogis' unconsolidated entities also are not considered to be
discontinued operations under SFAS No. 144. For the six months ended June 30,
2002, ProLogis is not reporting discontinued operations for the properties
disposed of to third parties during the period as the effect of such
presentation in ProLogis' Consolidated Condensed Statements of Earnings and
Comprehensive Income is not material.

2. REAL ESTATE

Real Estate Investments

Real estate investments consisting of income producing industrial
distribution properties, properties under development and land held for future
development, at cost, are summarized as follows (in thousands):

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(1) As of June 30, 2002 and December 31, 2001, ProLogis had 1,186 and 1,208
directly owned distribution properties, respectively, consisting of
120,304,000 and 123,356,000 square feet, respectively.

(2) Properties under development consist of 30 buildings aggregating 7,447,000
square feet as of June 30, 2002 and 16 buildings aggregating 5,357,000
square feet as of December 31, 2001.

(3) In addition to the June 30, 2002 construction costs payable balance of
$13.4 million, ProLogis had unfunded commitments on its contracts for
properties under construction totaling $190.9 million as of June 30, 2002.

(4) Land held for future development consists of 1,884 acres as of June 30,
2002 and 1,976 acres as of December 31, 2001.

(5) Other investments include: (i) restricted funds that have been escrowed
pending the completion of tax-deferred exchange transactions; (ii) earnest
money deposits related to potential acquisitions; and (iii) costs incurred
during the pre-acquisition due diligence process. Restricted funds include
$36.3 million and $65.0 million on deposit with title companies as of June
30, 2002 and December 31, 2001, respectively.

ProLogis' distribution properties, properties under development and land
held for future development are located in North America (the United States and
Mexico), eight countries in Europe and in Japan. No individual market, as
defined by ProLogis and presented in its 2001 Annual Report on Form 10-K, as
amended, represents more than 10% of ProLogis' total real estate assets.

Operating Lease Agreements

ProLogis leases its properties to customers under agreements that are
classified as operating leases. As of June 30, 2002, minimum lease payments on
leases with lease periods greater than one year for space in ProLogis' directly
owned properties during each of the years in the five-year period ending
December 31, 2006 and thereafter are as follows (in thousands):

Remainder of 2002................................... $ 202,108
2003................................................ 342,989
2004................................................ 257,942
2005................................................ 181,133
2006................................................ 120,773
2007 and thereafter................................. 208,312
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$ 1,313,257
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ProLogis' largest customer (based on rental income) in its directly owned
properties accounted for 0.89% of ProLogis' annualized rental income for the six
months ended June 30, 2002. The annualized base rent for ProLogis' 25 largest
customers (based on rental income) accounted for 13.6% of ProLogis' annualized
rental income for the six months ended June 30, 2002.

3. UNCONSOLIDATED ENTITIES

Investments In and Advances To Unconsolidated Entities

Investments in and advances to unconsolidated entities are as follows (in
thousands):

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(1) ProLogis made an additional equity investment of $31.5 million in ProLogis
Logistics Services Incorporated ("ProLogis Logistics") during the six
months ended June 30, 2002. These funds were used by ProLogis Logistics to
repay ProLogis Logistics, direct borrowings under ProLogis' line of credit.
ProLogis Logistics owns CS Integrated LLC ("CSI"), a temperature-controlled
distribution company operating in the United States. As of June 30, 2002,
all of the operating assets of CSI were classified as held for sale.
Negotiations for the sale of substantially all of the operating assets of
CSI are ongoing, however, there can be no assurance that such sale will
occur or that, should a sale occur, ProLogis will recover its entire
investment in ProLogis Logistics.

(2) During the six months ended June 30, 2002, Frigoscandia Holding S.A.
("Frigoscandia S.A.") and its wholly owned subsidiaries disposed of 46.5
million cubic feet of operating facilities representing all of the assets
in Sweden, Denmark, Finland, Norway, the Netherlands, Germany, Spain and
Italy. These dispositions generated net proceeds of $123.6 million and a
net loss of $4.2 million. Of the total proceeds, approximately $90.0
million was used to repay all but $0.4 million of the entities' outstanding
third party debt. As of June 30, 2002, Frigoscandia S.A. and its wholly
owned subsidiaries owned or operated 106.3 million cubic feet of
temperature-controlled distribution facilities, substantially all of which
are located in France and the United Kingdom.

(3) ProLogis-Macquarie Fund ("ProLogis North American Properties Fund V") was
formed on March 28, 2002 as a general partnership between an affiliate of
Macquarie Bank Limited ("Macquarie Bank") with an 85% ownership interest
and ProLogis with a 15% ownership interest. On formation, ProLogis North
American Properties Fund V acquired 22 distribution properties aggregating
3.9 million square feet in 12 markets in the United States and two markets
in Mexico from ProLogis. ProLogis North American Properties Fund V acquired
19 additional distribution properties aggregating 4.3 million square feet
in seven markets in the United States and three markets in Mexico from
ProLogis during June 2002. After this acquisition, this entity's total
portfolio consists of 41 distribution properties aggregating 8.2 million
square feet in 14 markets in the United States and three markets in Mexico.

In June 2002, Macquarie ProLogis Trust ("MPRCA") acquired Macquarie Bank's
ownership interest in ProLogis North American Properties Fund V. MPRCA was
formed in June 2002 as a listed property trust in Australia and began
trading its shares on the Australian Stock Exchange on June 26, 2002. The
proceeds from this initial public offering funded the acquisition of
Macquarie Bank's ownership interest. Coincident with the June 2002
contribution of properties, a management company was formed to act as
manager of ProLogis North American Properties Fund V. The management
company, in which ProLogis and Macquarie Bank each have a 50% ownership
interest, also has a direct ownership interest in ProLogis North American
Properties Fund V. After these transactions were completed, the ownership
of ProLogis North American Properties Fund V was: (i) 78.7% owned by MPRCA;
(ii) 16.9% owned by ProLogis (direct interest and through its 50% ownership
interest in the management company); and (iii) 4.4% owned by Macquarie Bank
(all through its 50% ownership interest in the management company). The
investment amount recorded by ProLogis represents its total equity
investment in ProLogis North American Properties Fund V (both direct and
through its ownership in the management company), including acquisition
costs, as adjusted for ProLogis' share of cumulative earnings of

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these entities and the portion of the gains resulting from the disposition
of ProLogis' properties to ProLogis North American Properties Fund V that
does not qualify for income recognition by ProLogis due to its continuing
ownership in ProLogis North American Properties Fund V.

(4) ProLogis European Properties Fund acquired four additional properties from
ProLogis aggregating 1.1 million square feet at a total cost of $55.7
million during the six months ended June 30, 2002. Also during this period,
ProLogis European Properties Fund acquired five properties aggregating 1.2
million square feet at a total cost of $135.7 million from Kingspark
Holding S.A. ("Kingspark S.A."). Kingspark S.A. is an unconsolidated entity
of ProLogis that owns and operates a CDFS business in the United Kingdom.
ProLogis received an additional equity investment in ProLogis European
Properties Fund aggregating $30.8 million in connection with these
contributions. ProLogis also made additional cash investments of $31.7
million in ProLogis European Properties Fund during the six months ended
June 30, 2002.

(5) ProLogis owns all of the non-voting preferred stock of Kingspark S.A. and
all of the non-voting membership interest of Kingspark LLC. Kingspark LLC
owns the voting common stock of Kingspark S.A. The voting membership
interest of Kingspark LLC is owned by K. Dane Brooksher, ProLogis' chairman
and chief executive officer. These combined investments do not give
ProLogis control of these entities. Therefore, ProLogis recognizes its
99.75% share of the combined earnings or losses of these entities under the
equity method. As of July 1, 2002, ProLogis and Mr. Brooksher agreed that
ProLogis would acquire the voting membership interest of Kingspark LLC from
Mr. Brooksher. This transaction will result in ProLogis owning 100% of
Kingspark S.A. Accordingly, the accounts of Kingspark S.A. are expected to
be consolidated in ProLogis' financial statements along with ProLogis'
other majority-owned and controlled subsidiaries and partnerships.

(6) During the six months ended June 30, 2002, ProLogis, under the equity
method, recognized its share of an impairment adjustment recognized by
GoProLogis Incorporated ("GoProLogis"). This impairment adjustment reduced
GoProLogis' investment in the non-cumulative preferred stock of Vizional
Technologies Inc. ("Vizional Technologies") to zero. The investment in
Vizional Technologies is GoProLogis' only asset.

Income (Loss) from Unconsolidated Entities

ProLogis recognized income (loss) from its investments in unconsolidated
entities as follows (in thousands):

10

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(1) Amounts represent ProLogis' share of the earnings or losses of CSI/Frigo
LLC recognized under the equity method based upon its ownership interest in
CSI/Frigo LLC (effectively 95%) and interest income on outstanding notes.
CSI/Frigo LLC recognizes its share of the earnings or losses of ProLogis
Logistics and Frigoscandia S. A. under the equity method based upon its 5%
ownership interest in each entity.

(2) ProLogis recognizes its direct share of the earnings or losses of ProLogis
Logistics and Frigoscandia S.A. under the equity method based upon its
direct 95% ownership interest in each entity and also recognizes interest
income on outstanding notes, if any.

(3) Income includes property and asset management, leasing, development and
other fees of $752,000 and $1,569,000 for the three and six months ended
June 30, 2002, respectively, and $908,000 and $1,574,000 for the three and
six months ended June 30, 2001, respectively. ProLogis has had a 50%
ownership interest in ProLogis California since its inception.

(4) Income includes property and asset management, leasing, development and
other fees of $337,000 and $1,246,000 for the three and six months ended
June 30, 2002, respectively, and $616,000 and $1,128,000 for the three and
six months ended June 30, 2001, respectively. ProLogis had a 20% ownership
interest in ProLogis North American Properties Fund I from its inception in
2000 until January 14, 2001 and has had a 41.3% ownership interest since
that date.

(5) Income includes property and asset management and other fees of $481,000
and $1,014,000 for the three and six months ended June 30, 2002,
respectively, and $501,000 and $546,000 for the three and six months ended
June 30, 2001, respectively. No leasing fees were earned in either period.
ProLogis has had a 20% ownership interest in ProLogis North American
Properties Fund II since its inception in 2000.

(6) ProLogis North American Properties Fund III was formed on June 15, 2001.
Income includes property and asset management, leasing and other fees of
$536,000 and $1,048,000 for the three and six months ended June 30, 2002,
respectively. ProLogis has had a 20% ownership interest in ProLogis North
American Properties Fund III since its inception.

(7) ProLogis North American Properties Fund IV was formed on September 21,
2001. Income includes property and asset management, leasing and other fees
of $296,000 and $619,000 for the three and six months ended June 30, 2002,
respectively. ProLogis has had a 20% ownership interest in ProLogis North
American Properties Fund IV since its inception.

(8) ProLogis North American Properties Fund V was formed on March 28, 2002.
Income includes property management and other fees of $3,354,000 for the
three and six months ended June 30, 2002, respectively. No leasing fees
were earned in either period. ProLogis had a 15.0% ownership interest in
ProLogis North American Properties Fund V from its inception until June 28,
2002 and has had a 16.9% ownership interest since that date.

(9) Income includes property and asset management fees of $3,782,000 and
$7,066,000 for the three and six months ended June 30, 2002, respectively,
and $2,865,000 and $4,587,000 for the three and six months ended June 30,
2001, respectively. ProLogis recognizes its share of the earnings or losses
of ProLogis European Properties Fund based on its average ownership
interest during the respective period, which was 33.4% and 41.2% for the
six months ended June 30, 2002 and 2001, respectively. ProLogis had a 31.7%
and 39.7% ownership interest in ProLogis European Properties Fund as of
June 30, 2002 and 2001, respectively.

(10) Amount in 2001 represents income from ProLogis' investment in 49.9% of the
common stock of ProLogis European Properties S.a.r.l. for the period from
January 1, 2001 to January 6, 2001. As of January 7, 2001, ProLogis
European Properties S.a.r.l. was 100% owned by ProLogis European Properties
Fund.

(11) Amounts represent ProLogis' share of the earnings or losses of Kingspark
LLC recognized under the equity method based upon its 95% ownership
interest in Kingspark LLC. Kingspark LLC recognizes its share of the

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earnings or losses of Kingspark S.A. under the equity method based upon its
5% ownership interest in the entity.

(12) ProLogis recognizes its direct share of the earnings or losses of Kingspark
S.A. under the equity method based upon its 95% direct ownership interest
in Kingspark S.A.

(13) For the six months ended June 30, 2002, the amount consists of ProLogis'
share of the loss of GoProLogis recognized under the equity method.
GoProLogis' loss consists entirely of an impairment adjustment that reduces
its investment in Vizional Technologies to zero. For the three and six
months ended June 30, 2001, the amount consists of ProLogis' share of the
income of GoProLogis recognized under the equity method. GoProLogis' income
consists of license fee income earned from Vizional Technologies for the
non-exclusive use of the ProLogis Operating Systems(R).

(14) For the three months ended June 30, 2001, ProLogis, under the equity
method, recognized its share of an impairment adjustment of $7.5 million
recognized by ProLogis Broadband (1) Incorporated ("ProLogis PhatPipe").
This impairment adjustment reduced ProLogis PhatPipe's investment in the
non-cumulative preferred stock of PhatPipe Inc. ("PhatPipe") to zero. The
investment in PhatPipe was ProLogis PhatPipe's only asset. For the six
months ended June 30, 2001, Prologis PhatPipe also earned license fee
income from PhatPipe for the non-exclusive use of the ProLogis Operating
System(R).

Temperature-Controlled Distribution Companies

ProLogis' total investment in its temperature-controlled distribution
companies as of June 30, 2002 consisted of (in millions of U.S. dollars):

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(1) ProLogis owns 89% of the membership interests (all non-voting) and K. Dane
Brooksher, ProLogis' chairman and chief executive officer, owns 11% of the
membership interests (all voting) of CSI/Frigo LLC, a limited liability
company. Additionally, ProLogis has a note agreement with CSI/Frigo LLC
that allows ProLogis to participate in its earnings such that ProLogis
recognizes 95% of the earnings or losses of CSI/Frigo LLC. ProLogis does
not have control of CSI/Frigo LLC, therefore, ProLogis accounts for its
investment in this entity under the equity method.

(2) ProLogis directly owns all of the non-voting preferred stock of ProLogis
Logistics, representing a 99.23% interest in the earnings or losses of
ProLogis Logistics. ProLogis Logistics owns 100% of CSI. The voting common
stock of ProLogis Logistics is owned by CSI/Frigo LLC. ProLogis does not
have control of ProLogis Logistics therefore, ProLogis accounts for its
investment in this entity under the equity method.

(3) ProLogis directly owns all of the non-voting preferred stock of
Frigoscandia S.A., representing a 95% interest in the earnings or losses of
Frigoscandia S.A. The voting common stock of Frigoscandia S.A. is owned by
CSI/Frigo LLC. ProLogis does not have control of Frigoscandia S.A.,
therefore, ProLogis accounts for its investment in this entity under the
equity method.

(4) Represents other receivables only, primarily for funding of interest
payments related to ProLogis Logistics' third party debt.

(5) In addition to other receivables aggregating $47.5 million (primarily
interest on notes receivable) the balance includes:

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o 776.6 million Swedish krona (the currency equivalent of approximately
$85.2 million as of June 30, 2002) unsecured note from a wholly owned
subsidiary of Frigo S.a.r.l.; interest at 5.0% per annum; due on demand;

o 12.8 million euro (the currency equivalent of approximately $12.7
million as of June 30, 2002) unsecured note from a wholly owned
subsidiary of Frigo S.a.r.l.; interest at 5.0% per annum; due on demand;

o $105.4 million unsecured note from Frigoscandia S.A., interest at 5.0%
per annum; $80.0 million due July 15, 2008 with the remainder due on
demand; and

o 41.2 million euro (the currency equivalent of approximately $41.1
million as of June 30, 2002) unsecured note from Frigo S.a.r.l.;
interest at 5.0% per annum; due on demand.

Property Funds

ProLogis' total investment in property funds as of June 30, 2002 consisted
of (in millions of U.S. dollars):

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(1) Third parties (21 institutional investors) have invested 878.6 million
euros (the currency equivalent of approximately $875.4 million as of June
30, 2002) in ProLogis European Properties Fund and have committed to fund
an additional 181.7 million euros (the currency equivalent of approximately
$181.1 million as of June 30, 2002) by September 15, 2002. ProLogis is
committed to make additional capital contributions of 25.1 million euros
(the currency equivalent of approximately $25.0 million as of June 30,
2002) by September 15, 2002 under the terms of a subscription agreement.
All remaining commitments of capital to ProLogis European Properties Fund
are expected to be funded by September 15, 2002.

(2) Reflects the reduction in carrying value for the portions of net gains on
the disposition of properties to each entity that do not qualify for
current income recognition by ProLogis due to ProLogis' continuing
ownership in the entities.

(3) Includes acquisition costs related to ProLogis' investment in the property
funds and, with respect to ProLogis European Properties Fund, ProLogis'
share of the cumulative foreign currency translation adjustments.

On June 11, 2002, ProLogis formed a property fund with an affiliate of the
Government of Singapore Investment Corporation (Realty) Pte. Ltd. ("GIC"). This
fund was formed to own newly developed and acquired properties in certain
distribution markets in Japan. The property fund's initial capitalization is
expected to occur upon the acquisition of a 196,000 square foot distribution
property that ProLogis has currently under development in Tokyo. The acquisition
is subject to the property meeting certain criteria. GIC has committed to invest
up to $300.0 million in equity through June 2006 subject to the availability of
properties meeting the specified criteria. GIC will have an 80% ownership
interest, with ProLogis maintaining a 20% ownership interest.

Kingspark S.A.

Kingspark S.A. owns Kingspark Group Holdings Limited ("ProLogis Kingspark"),
a CDFS company operating in the United Kingdom. In addition to its equity
investments and other receivables of $23.7 million (primarily interest on notes
receivable), ProLogis had the following amounts due from Kingspark S.A. and
Kingspark LLC as of June 30, 2002:

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o 59.0 million pound sterling (the currency equivalent of approximately
$88.4 million as of June 30, 2002) mortgage note from Kingspark S.A.;
secured by land parcels; interest at 5.5% per annum; due on demand;

o $117.3 million unsecured note from Kingspark S.A.; interest at 5.0% per
annum; due on demand;

o 128.9 million pound sterling (the currency equivalent of approximately
$193.0 million as of June 30, 2002) outstanding on an unsecured
revolving loan facility from ProLogis to Kingspark S.A.; interest at
5.1% per annum; due on demand; and

o $7.3 million unsecured note from Kingspark LLC; interest at 8.0% per
annum; due in January 2006.

As of June 30, 2002, Kingspark S.A. owned 2.5 million square feet of
distribution properties at an investment of $238.3 million and 1.2 million
square feet of properties under development with an expected cost at completion
of $125.2 million. Additionally, as of June 30, 2002, Kingspark S.A. owned 244
acres of land and controlled 740 acres of land through purchase options, letters
of intent or contingent contracts. The land owned and controlled by Kingspark
S.A. has the capacity for the future development of approximately 16.5 million
square feet of properties.

ProLogis Kingspark has a line of credit agreement with a bank in the United
Kingdom. The line of credit agreement provides for borrowings of up to 25.0
million pounds sterling (the currency equivalent of approximately $38.3 million
as of June 30, 2002) and has been guaranteed by ProLogis. As of June 30, 2002,
no borrowings were outstanding on the line of credit. However, as of June 30,
2002, ProLogis Kingspark had the currency equivalent of approximately $8.3
million of letters of credit outstanding that reduce the amount of borrowings
available to ProLogis Kingspark on the line of credit.

Summarized Financial Information

Summarized financial information for certain of ProLogis' unconsolidated
entities as of June 30, 2002 and for the six months then ended is presented
below (in millions of U.S. dollars). The information presented is for the entire
entity.

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(1) For the three and six months ended June 30, 2001, weighted average limited
partnership units of 5,088,000 were not included in the calculation of
diluted per share net earnings attributable to Common Shares as the effect,
on an as-converted basis, was antidilutive.

(2) The Series B convertible redeemable preferred shares were redeemed as of
March 20, 2001.

(3) Total weighted average potentially dilutive instruments outstanding were
10,354,000 and 8,821,000 for the three months ended June 30, 2002 and 2001,
respectively, and 10,509,000 and 9,163,000 for the six months ended June
30, 2002 and 2001, respectively. Of the total potentially dilutive
instruments, 1,538,000 and 5,272,000 were antidilutive for the three months
ended June 30, 2002 and 2001, respectively, and 1,559,000 and 3,927,000
were antidilutive for the six months ended June 30, 2002 and 2001,
respectively.

7. BUSINESS SEGMENTS

ProLogis has three reportable business segments:

o Property operations represents the long-term ownership (either directly
or through investments in unconsolidated property funds in which
ProLogis has an ownership interest and acts as manager), management and
leasing of distribution properties in the United States, Mexico and
Europe. Each operating property is considered to be an individual
operating segment having similar economic characteristics that are
combined within the reportable segment based upon geographic location.

16

o CDFS business represents the development or acquisition and
rehabilitation of distribution properties by ProLogis and Kingspark S.A.
(which is not consolidated in ProLogis' financial statements) in the
United States, Mexico, Europe and Japan that are often sold to third
parties or contributed to unconsolidated property funds in which
ProLogis has an ownership interest and acts as manager. Additionally, in
the United States, Mexico and Europe, ProLogis and Kingspark S.A. earn
fees for development activities on behalf of customers and realize
profits from the sale of land parcels when their CDFS business plans no
longer include development of these parcels. The operations of this
segment are considered to be one operating segment with information
presented based upon geographic location.

o Temperature-controlled distribution operations represents the operation
of a temperature-controlled distribution and logistics network through
investments in unconsolidated entities in the United States (ProLogis
Logistics) and Europe (Frigoscandia S.A.). The operations of these
entities are considered to be one operating segment with information
presented based upon geographic location.

Reconciliations of the following items for ProLogis' three reportable
segments' are presented below: (i) income from external customers to ProLogis'
total income; (ii) net operating income from external customers to ProLogis'
earnings before minority interest (ProLogis' chief operating decision makers
rely primarily on net operating income and related measures to make decisions
about allocating resources and assessing segment performance); and (iii) assets
to ProLogis' total assets. All amounts are in thousands of U.S. dollars.

- ----------

(1) In addition to the operations of ProLogis that are reported on a
consolidated basis, includes amounts recognized under the equity method
related to ProLogis' investment in unconsolidated property funds. See Note
3.

(2) Although 11 of the total of 30 distribution properties owned by ProLogis
North American Properties Fund V are located in Mexico, ProLogis classifies
its entire investment in ProLogis North American Properties Fund V and the
associated income recognized under the equity method from this entity as
part of its United States income, net operating income and assets for the
property operations segment.

(3) Amounts recognized under the equity method include net foreign currency
exchange losses of $2.7 million and net foreign currency exchange gains of
$2.3 million for the six months ended June 30, 2002 and 2001, respectively.
See Note 3.

(4) Includes $28.7 million and $20.8 million of net gains recognized by
ProLogis related to the disposition of properties to unconsolidated
property funds during the six months ended June 30, 2002 and 2001,
respectively.

(5) Includes $10.7 million of net gains recognized by ProLogis related to the
disposition of properties to ProLogis North American Properties Fund V
during the six months ended June 30, 2002.

(6) Includes amounts recognized under the equity method related to ProLogis'
investment in Kingspark S.A. and Kingspark LLC (including $4.4 million of
net foreign currency exchange gains and $8.9 million of net foreign
currency exchange losses for the six months ended June 30, 2002 and 2001,
respectively). See Note 3.

(7) Includes $10.8 million and $6.4 million of net gains recognized by ProLogis
related to the disposition of properties to ProLogis European Properties
Fund for the six months ended June 30, 2002 and 2001, respectively. In
addition, includes $10.5 million and $10.7 million of net gains recognized
under the equity method related to the disposition of properties to
ProLogis European Properties Fund by Kingspark S.A. for the six months
ended June 30, 2002 and 2001, respectively.

18

`

(8) Represents amounts recognized under the equity method related to ProLogis'
investment in ProLogis Logistics and CSI/Frigo LLC. CSI/Frigo LLC
recognizes income under the equity method based upon its common stock
investment in ProLogis Logistics. See Note 3.

(9) Represents amounts recognized under the equity method related to ProLogis'
investment in Frigoscandia S.A. and CSI/Frigo LLC. CSI/Frigo LLC recognizes
income under the equity method based upon its common stock investment in
Frigoscandia S.A. Includes $4.7 million of net foreign currency exchange
gains and $0.6 million of net foreign currency exchange losses for the six
months ended June 30, 2002 and 2001, respectively. See Note 3.

(10) Amounts include investments in unconsolidated entities accounted for under
the equity method. See Note 3.

8. SUPPLEMENTAL CASH FLOW INFORMATION

Non-cash investing and financing activities for the six months ended June
30, 2002, and 2001 are as follows:

o ProLogis received $34.4 million and $63.7 million of the proceeds from
its disposition of properties to unconsolidated property funds in the
form of an equity interest in these entities during the six months in
2002 and 2001, respectively.

o Limited partnership units aggregating $0.8 million were converted into
Common Shares in 2002.

o ProLogis received $10.8 million of the proceeds from its disposition of
a property to a third party and $4.2 million of the proceeds from its
disposition of properties to ProLogis European Properties Fund in the
form of notes receivable during the six months in 2001.

o In connection with the acquisition of properties, ProLogis assumed
$7.7 million of mortgage notes in 2001.

o Series B cumulative convertible redeemable preferred shares aggregating
$151.8 million were converted into Common Shares during the six months
in 2001.

o Net foreign currency translation adjustments of $52,514,000 and
$(62,630,000) were recognized for the six months in 2002 and 2001,
respectively.

o In connection with the agreement for the acquisition of Kingspark S.A.,
ProLogis issued approximately 67,000 Common Shares valued at $1.5
million during the six months in 2001.

o ProLogis contributed its 49.9% of the common stock of ProLogis European
Properties S.a.r.l. to ProLogis European Properties Fund for an
additional equity interest in ProLogis European Properties Fund of $83.0
million and cash of $16.8 million during the six months in 2001.
ProLogis' basis in this investment prior to contribution was $84.8
million.

9. RELATED PARTY TRANSACTION

During the six months ended June 30, 2002, ProLogis paid fees of $4.1
million to an entity previously affiliated with Security Capital. These fees
were earned as a result of the capital raised in ProLogis North American
Properties Fund V. At the time the arrangement was entered into, Security
Capital was ProLogis' largest shareholder. Security Capital disposed of its
ownership interest in this entity prior to its merger with GE Capital in May
2002. See Notes 3 and 4.

10. COMMITMENTS AND CONTINGENCIES

In addition to the guarantees of third-party debt of ProLogis Logistics and
Kingspark S.A. discussed in Note 3, ProLogis could have potential contingent
obligations with respect to environmental matters. ProLogis or the predecessor
owner has subjected all of the properties acquired by ProLogis to environmental
reviews. While some of these assessments have led to further investigation and
sampling, none of the environmental assessments has revealed, nor is ProLogis
aware of any environmental liability (including asbestos related liability) that
ProLogis believes would have a material adverse effect on ProLogis' business,
financial condition or results of operations.

19

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

Board of Trustees and Shareholders
ProLogis:

We have reviewed the accompanying consolidated condensed balance sheet of
ProLogis (formerly ProLogis Trust) and subsidiaries as of June 30, 2002, and the
related consolidated condensed statement of earnings and comprehensive income
for the three month and six month periods ended June 30, 2002 and the
consolidated condensed statement of cash flows for the six month period ended
June 30, 2002. These consolidated condensed financial statements are the
responsibility of ProLogis' management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.

The consolidated financial statements of ProLogis as of and for the year ended
December 31, 2001 were audited by other accountants whose report dated April 3,
2002, expressed an unqualified opinion on those consolidated financial
statements. Such consolidated financial statements were not audited by us and,
accordingly, we do not express an opinion or any form of assurance on the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 2001. Additionally, the consolidated condensed statements of
earnings and comprehensive income for the three month and six month periods
ended June 30, 2001, and the related statement of cash flows for the six month
period ended June 30, 2001, were reviewed by other accountants whose report
dated August 10, 2001; except with respect to Note 2 as to which the date is
April 3, 2002, stated that they were not aware of any material modifications
that should be made to those statements in order for them to be in conformity
with accounting principles generally accepted in the United States.

KPMG LLP

San Diego, California
July 25, 2002

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with ProLogis'
Consolidated Condensed Financial Statements and the notes thereto included in
Item 1 of this report. See also ProLogis' 2001 Annual Report on Form 10-K, as
amended.

The statements contained in this discussion that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in which
ProLogis operates, management's beliefs, and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Specifically, but not limited to, comments concerning
ProLogis' expectations with respect to the United States economy, ProLogis'
ability to raise private capital and generate income in the CDFS business
segment (specifically the comments with respect to the ability of the ProLogis
European Properties Fund to obtain additional capital to acquire ProLogis'
completed development properties past September 15, 2002) and ProLogis' plans
for its divestiture of assets from the temperature-controlled distribution
operations segment are forward-looking statements. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. Factors which may affect outcomes and results
include: (i) changes in general economic conditions in ProLogis' markets that
could adversely affect demand for ProLogis' properties and the creditworthiness
of ProLogis' customers; (ii) changes in financial markets, interest rates and
foreign currency exchange rates that could adversely affect ProLogis' cost of
capital and its ability to meet its financial needs and obligations; (iii)
increased or unanticipated competition for distribution properties in ProLogis'
target market cities; (iv) the availability of private capital to ProLogis; and
(v) those factors discussed in ProLogis' 2001 Annual Report on Form 10-K, as
amended.

RESULTS OF OPERATIONS

Six Months Ended June 30, 2002 and 2001

ProLogis' net earnings attributable to Common Shares were $111.8 million for
the six months ended June 30, 2002 as compared to $88.6 million for the same
period in 2001. For the six months ended June 30, 2002, basic and diluted per
share net earnings attributable to Common Shares were $0.63 and $0.62 per share,
respectively. Basic and diluted per share net earnings attributable to Common
Shares were $0.52 and $0.51 per share, respectively, for the same period in
2001.

ProLogis adopted SFAS No. 142 on January 1, 2002. Accordingly, ProLogis and
its unconsolidated entities did not recognize amortization expense related to
goodwill for the six months ended June 30, 2002 of approximately $3.6 million
($3.3 million of which represents ProLogis' share of amortization expense
related to goodwill of its unconsolidated entities). See Note 1 to ProLogis'
Consolidated Condensed Financial Statements in Item 1.

Net operating income from ProLogis' temperature-controlled distribution
operations segment was the primary source of the increase in ProLogis' net
earnings for the six months ended June 30, 2002 over the same period in 2001.
Net operating income in this segment increased by $25.5 million in 2002 over the
same period in 2001. See "--Temperature Controlled Distribution Operations". The
CDFS business segment, which provides capital for ProLogis to fund its
development activities in addition to generating profits that contribute to
ProLogis' net earnings, generated net operating income of $79.4 million for the
six months in 2002 as compared to net operating income of $68.5 million for the
six months in 2001. Net operating income in this segment is dependent on the
volume of properties developed by ProLogis and Kingspark S.A. that are
contributed to unconsolidated property funds in which ProLogis maintains an
ownership interest, as well as sold to third parties. See "--CDFS Business". Net
operating income from ProLogis' property operations segment decreased for the
six months ended June 30, 2002 over the same period in 2001 by $4.2 million.
ProLogis' property operations segment's net operating income consists of rental
income and net rental expenses from properties directly owned by ProLogis,
ProLogis' share of the earnings of its unconsolidated property funds that engage
in property operations segment activities and fees earned from these entities.
See "--Property Operations".

Property Operations

21

Operating Portfolio

ProLogis owned or had ownership interests in the following distribution
properties as of the dates indicated (square feet in thousands):

- ----------

(1) Includes distribution properties owned by ProLogis and its consolidated
entities. The decrease in 2002 from 2001 is primarily the result of the
formation of new unconsolidated property funds. Generally the entire
portfolios of these entities consist of distribution properties that were
previously directly owned by ProLogis.

(2) Since December 31, 2001, ProLogis California has acquired two properties
from ProLogis and disposed of two properties to third parties.

(3) ProLogis North American Properties Fund I completed development of one
property in 2002.

(4) This entity was formed on September 21, 2001. The distribution properties
owned by this entity were all previously directly owned by ProLogis.

(5) This entity was formed on March 28, 2002. The distribution properties owned
by this entity were all previously directly owned by ProLogis.

(6) From June 30, 2001 to December 31, 2001, this entity acquired 23 properties
from ProLogis or Kingspark S.A. and five properties from third parties and
disposed of one property to a third party. From December 31, 2001 to June
30, 2002, this entity acquired nine properties from ProLogis and Kingspark
S.A. and 14 properties from third parties.

Net Operating Income

ProLogis' property operations segment income consists of: (i) net operating
income (rental income less net rental expenses) from the distribution properties
that are owned by ProLogis directly and (ii) the income recognized by ProLogis
under the equity method from its investments in unconsolidated property funds
engaged in the property operations business as well as fee income earned from
these entities. The net operating income from distribution properties that are
developed by ProLogis in its CDFS business segment is included in the net
operating income of the property operations segment until the properties are
contributed to an entity in which ProLogis maintains an ownership interest or
are sold to a third party. See Note 7 to ProLogis' Consolidated Condensed
Financial Statements in Item 1. The amounts recognized under the equity method
for the unconsolidated property funds are based on the net earnings or losses of
each entity and include: net operating income, interest income, interest
expense, depreciation and amortization expenses, general and administrative
expenses, income taxes and foreign currency exchange gains and losses (with
respect to ProLogis European Properties Fund) and include fees earned by
ProLogis from these entities. ProLogis' net operating income from the property
operations segment is presented below (in thousands). See "-- Portfolio" for
information on the size of and changes in each unconsolidated property funds'
operating portfolio. See also Note 7 to ProLogis' Consolidated Condensed
Financial Statements in Item 1.

22

- ----------

(1) The decrease in rental income between periods presented is due to the
changes in the number and composition of the directly owned properties
during the six months in 2002 as compared to the six months in 2001. The
decrease in rental income resulting from lower occupancies is partially
offset by higher lease termination and renegotiation fees of $5.6 million
in 2002 as compared to $1.1 million in 2001. ProLogis cannot predict the
levels of termination and renegotiation fees that will be earned in the
future or whether it will be successful in re-letting the vacant space
associated with lease terminations in a timely manner.

(2) The increase in property operating expenses for the six months ended June
30, 2002 as compared to the same period in 2001 is primarily due to: (i) an
increase in bad debt expense ($1.5 million for the six months ended June
30, 2002 and $0.3 million for the same period in 2001) and (ii) an overall
increase in operating costs (rental expenses, excluding bad debt and before
recoveries from tenants, were 27.6% of rental income for the six months in
2002 as compared to 26.2% of rental income for the six months ended June
30, 2001) offset by (iii) a decrease in the number of directly owned
properties in 2002 as compared to 2001. The increase in bad debt expense
and operating costs is primarily attributable to the downturn in general
economic conditions in the United States experienced since the second
quarter of 2001. Total rental expense recoveries were 73.9% and 78.1% of
total rental expenses for the six months ended June 30, 2002 and 2001,
respectively. This decrease in rental expense recoveries is primarily
attributable to lower occupancy levels that results in fewer customers
available from whom certain fixed costs may be recovered.

(3) ProLogis has had a 50% ownership interest in ProLogis California since its
inception in 1999.

(4) ProLogis has had a 41.3% ownership interest in Prologis North American
Properties Fund I since January 15, 2001. From its inception in 2000 to
January 14, 2001 ProLogis' ownership interest was 20%. ProLogis' ownership
interest increased with the contribution of three additional properties,
the proceeds from which were all in the form of an additional equity
interest.

(5) ProLogis North American Properties Fund II owned three properties from
January 1, 2001 until March 27, 2001. On that date, ProLogis North American
Properties Fund II acquired an additional 24 properties from ProLogis,
bringing its total portfolio to 27 operating properties as of June 30,
2001. ProLogis has had a 20% ownership interest in this entity since its
inception in 2000.

(6) ProLogis North American Properties Fund III began operations on June 15,
2001. ProLogis has had a 20% ownership interest in this entity since its
inception.

(7) ProLogis North American Properties Fund IV began operations on September
21, 2001. ProLogis has had a 20% ownership in this entity since its
inception.

(8) ProLogis North American Properties Fund V began operations on March 28,
2002. ProLogis had a 15% ownership interest in this entity from inception
to June 28, 2002 when its ownership interest was increased to 16.9%.
ProLogis' share of the earnings of this entity includes fees of $3,192,000
earned by ProLogis with respect to the formation of this entity and for
services provided in arranging permanent third party debt financing.

23

(9) For the six months ended June 30, 2002 and 2001, ProLogis' share of the
earnings of ProLogis European Properties Fund includes net foreign currency
losses of $2.7 million and net foreign currency exchange gains of $2.3
million, respectively. Excluding net foreign currency exchange gains and
losses, ProLogis' share of the income of ProLogis European Properties Fund
would have been $14.6 million and $5.6 million for the six months ended
June 30, 2002 and 2001, respectively. The increase in ProLogis' combined
share of the income, excluding foreign currency gains and losses, of
ProLogis European Properties Fund for the six months ended June 30, 2002
over 2001 is primarily the result of additional properties owned in 2002 as
compared to 2001 as well as the resulting increase in fees earned by
ProLogis from this entity in 2002. ProLogis European Properties Fund
utilized third party debt to partially fund its portfolio growth. See Note
3 to ProLogis' Consolidated Condensed Financial Statements in Item 1.

(10) ProLogis European Properties S.a.r.l. has been 100% owned by ProLogis
European Properties Fund since January 7, 2001. The amount in 2001
represents ProLogis' share of the earnings of ProLogis European Properties
S.a.r.l. based on its 49.9% ownership interest in this entity for the
period from January 1, 2001 to January 7, 2001.

ProLogis' stabilized distribution properties (properties owned by ProLogis,
the unconsolidated property funds and Kingspark S.A.) were 90.3% occupied and
91.0% leased as of June 30, 2002. ProLogis' stabilized occupancy levels have
decreased as compared to 2001 levels (93.8% occupied and 95.0% leased.) The term
"stabilized" means, for acquisitions, any necessary capital improvements,
repositioning, new management and new marketing programs and, in the case of
newly developed properties, construction and marketing, have been in effect for
a sufficient period of time (generally 12 months) to achieve stabilized
occupancy (typically 93%, but ranging from 90% to 95%, depending on the
submarket and product type).

ProLogis believes that the decrease in its stabilized occupancy levels in
2002 is the result of the current economic conditions in the United States that
have led to a slowing in customer leasing decisions and to a slowing in the
absorption of new distribution properties in ProLogis' markets. ProLogis does
not expect market conditions affected by the United States economy to improve
until the end of 2002 or early 2003 and believes that market occupancies could
continue to decline during the remainder of 2002. However, ProLogis believes
that its global operating platform and the ProLogis Operating System(R) will
partially mitigate the effects of these market occupancy decreases to ProLogis
because ProLogis has been able to build strong local market presence and
customer relationships not only in the United States but also in Europe. Based
on its leasing activities in Europe, ProLogis believes that shifts in
distribution patterns of its customers and their need to reduce distribution
costs are the primary drivers of leasing decisions within its European markets.
Consequently, ProLogis has not experienced leasing volume declines as during the
first six months in 2002, ProLogis signed 4.2 million square feet of leases in
Europe as compared to 3.6 million square feet of leases signed during the same
period in 2001.

The average increase in rental rates for both new and renewed leases on
previously leased space (25.2 million square feet) for all properties, including
those owned by ProLogis' unconsolidated property funds and Kingspark S.A., for
the six months ended June 30, 2002 was 5.0% as compared to 18.3% for the same
period in 2001. ProLogis believes that the weaker rental rate growth generated
in 2002 as compared to 2001 reflects the downturn in economic conditions since
the second quarter of 2001. For the six months ended June 30, 2002, the net
operating income (rental income less net rental expenses) generated by ProLogis'
"same store" portfolio of distribution properties (distribution properties owned
by ProLogis and the unconsolidated property funds and Kingspark S. A. that were
in operation throughout both six month periods in 2002 and 2001) increased by
0.5% over the same period in 2001 (as compared to an increase of 2.81% during
the six months in 2001 as compared to the same period in 2000). The decrease in
the growth rate in same store net operating income is primarily due to increased
bad debt expense in 2002 and also due to lower occupancy levels in the same
store portfolio in 2002 as compared to 2001.

CDFS Business

Net operating income from ProLogis' CDFS business segment consists primarily
of: (i) the profits from the disposition of land parcels and distribution
properties that were developed or acquired and rehabilitated by ProLogis and
then sold to third parties or contributed to unconsolidated property funds in
which ProLogis maintains an ownership interest; (ii) development management fees
earned by ProLogis; and (iii) income recognized under the equity method from
ProLogis' investment in Kingspark S.A.

ProLogis recognizes 99.75% of the earnings of Kingspark S.A. under the
equity method (including its share recognized through its ownership in Kingspark
LLC) which includes net operating income, interest income, interest expense (net
of amounts capitalized), general and administrative expense (net of amounts
capitalized), income taxes

24

and foreign currency exchange gains and losses. As of July 1, 2002, ProLogis and
Mr. Brooksher agreed that ProLogis would acquire the voting membership interest
of Kingspark LLC from Mr. Brooksher, ProLogis' chairman and chief executive
officer. This transaction will result in ProLogis owning 100% of Kingspark S.A.
Accordingly, the accounts of Kingspark S.A are expected to be consolidated in
ProLogis' financial statements along with ProLogis' other majority-owned and
controlled subsidiaries and partnerships. See Note 3 to ProLogis' Consolidated
Condensed Financial Statements in Item 1.

Income from the CDFS business segment is dependent on ProLogis' ability to
develop and lease distribution properties that can be disposed of to generate
profits and its ability to raise private capital through the formation of
property funds or other sources. There can be no assurance that ProLogis will be
able to maintain the level of profits in this business segment. See "--
Liquidity and Capital Resource--Overview".

The CDFS business segment operations increased during the six months ended
June 30, 2002 from the same period in 2001. The CDFS business segment income is
comprised of the following (in thousands):

- ----------

(1) Represents gains from the disposition of land parcels and properties as
follows:

o 2002: 12 acres; 8.3 million square feet; $390.1 million of proceeds;

o 2001: 138 acres; 8.9 million square feet; $452.9 million of proceeds.

(2) ProLogis' share of Kingspark S.A.'s income for the six months ended June 30,
2002 (including ProLogis' share of Kingspark S.A.'s income recognized
through its ownership in Kingspark LLC) increased by $16.8 million in 2002
as compared to 2001. This increase is primarily due to the recognition of
foreign currency exchange gains of $4.5 million in 2002 as compared to the
recognition of foreign currency exchange losses of $8.9 million in 2001.
ProLogis' share of Kingspark S.A.'s income also reflects the following:

o Gains from the disposition of land parcels and properties developed: (i)
23 acres; 1.2 million square feet; $146.4 million of proceeds; net gains
of $13.4 million in 2002 and (ii) 1.4 million square feet; $141.4
million of proceeds; net gains of $12.1 million in 2001;

o Development fees and other miscellaneous income of $7.7 million and $6.4
million in 2002 and 2001, respectively; and

o Deferred and current income tax expense of $2.6 million and $1.0 million
in 2002 and 2001, respectively.

(3) Consists primarily of land holding costs and the write-off of previously
capitalized pursuit costs.

Since 2000, ProLogis' focus in the CDFS business reflects the economic
climates of the regions in which it does business (i.e. less activity in North
America). As of December 31, 2000, 34% of ProLogis' CDFS business segment assets
were located in North America as compared to 21% as of June 30, 2002. ProLogis
believes that the continuing demand for state-of-the-art distribution properties
in Europe will continue to provide opportunities for ProLogis to expand its CDFS
business. Further to this objective, with 1,929 acres of land owned or
controlled in Europe as of June 30, 2002 including 984 acres of land owned and
controlled in the United Kingdom by Kingspark S.A. ProLogis believes it will not
be significantly affected by land entitlement constraints that currently exist
in Europe. ProLogis will continue to monitor leasing activity and general
economic conditions in the United States as it pertains to its CDFS business
segment operations. In 2001, ProLogis began its first development project in
Japan, which is expected to be acquired by the new Japan property fund upon
completion (see "--Liquidity and Capital Resources - Overview"). As in Europe,
ProLogis believes that demand for state-of-the-art distribution properties in
Japan will provide opportunities for ProLogis to expand its CDFS business.

25

Temperature-Controlled Distribution Operations

ProLogis recognizes income from the temperature-controlled distribution
operations segment of its business under the equity method. ProLogis' share of
the earnings or losses from this operating segment are below for the six months
ended June 30, 2002 and 2001 (in thousands). See Notes 3 and 7 to ProLogis'
Consolidated Condensed Financial Statements in Item 1.

- -------------

(1) Includes ProLogis' direct share of the earnings or losses of each entity and
ProLogis' share of the earnings or losses of each entity based on ProLogis'
ownership in CSI/Frigo LLC. See Note 7 to ProLogis' Consolidated Condensed
Financial Statements in Item 1. ProLogis recognized in excess of 99% of the
earnings of each entity for both periods.

(2) The increase in 2002 over 2001 for ProLogis Logistics is due to increased
occupancies and decreases in overhead costs as a result of cost saving
measures implemented. The decrease in 2002 over 2001 for Frigoscandia S.A.
is primarily the result of the disposition of 47.8 million cubic feet of
operating capacity since June 30, 2001 representing the disposition of all
of the operating assets in Sweden, Denmark, Finland, Norway, the Netherlands
and the remaining assets in Germany in the first quarter of 2002
(Frigoscandia S.A. disposed of certain German operating assets in the second
quarter of 2001) and Spain and Italy in the second quarter of 2002. The
total impact of these dispositions was mitigated by the effects of a
one-time lease termination fee earned in the first quarter of 2002 and by
cost saving measures implemented to reduce overhead costs.

(3) The decreases in interest expense for both companies are the result of lower
outstanding debt balances and interest rates in 2002 as compared to 2001.
The proceeds from the dispositions of operating assets by Frigoscandia S.A.
were used to repay substantially all of its third party debt.

(4) The operating assets of CSI have been classified as held for sale during
2002. Accordingly under GAAP, no depreciation and amortization expense is
recognized related to assets held for sale. Negotiations for the sale of
substantially all of the operating assets of CSI are ongoing, however, there
can be no assurance that such sale will occur or that, should a sale occur,
that ProLogis will recover its entire investment in ProLogis Logistics. The
decrease in depreciation and amortization expense for Frigoscandia S.A. is
the result of the disposition of 47.8 million cubic feet of operating assets
since June 30, 2001.

(5) The foreign exchange currency gains in 2002 result primarily from the
strengthening of the euro and Swedish krona against the U.S. dollar in 2002.
Frigoscandia S. A. has loans outstanding with ProLogis in these currencies.

Certain Other Income and Expense Items

Gains (Losses) on Disposition of Real Estate, Net

Gains (losses) on disposition of real estate, net represents the net gains
and losses from the disposition of distribution properties that were acquired or
developed for long-term use in the property operations segment. Generally,
ProLogis disposes of properties from the property operations segment because
such properties are considered to be non-strategic properties. Non-strategic
properties are assets located in markets or submarkets that are no longer
considered target markets as well as assets that were acquired as part of
previous portfolio acquisitions that are not consistent with ProLogis' core
portfolio based on the asset's size or configuration. Also, ProLogis has
contributed and will continue to contribute as necessary, properties from its
operating portfolio to complement the portfolio of

26

developed distribution properties that are acquired by the unconsolidated
property funds. During the six months ended June 30, 2002, ProLogis disposed of
18 operating properties with net sales proceeds of $53.5 million, resulting in a
net gain of $4.6 million (a net loss of $0.2 million was recognized in the first
quarter and a net gain of $4.8 million was recognized in the second quarter).
Six of these properties were disposed of as part of a condemnation order by the
city of Atlanta in the second quarter. The condemnation order was necessary to
allow for an expansion of an airport runway. ProLogis received proceeds of $15.7
million from this disposition and recognized a gain of $5.3 million.

During the six months ended June 30, 2001, ProLogis disposed of 13 operating
properties with net sales proceeds of $95.2 million, resulting in a net loss
recognized of $3.2 million (a net loss of $1.8 million was recognized in the
first quarter and a net loss of $1.4 million was recognized in the second
quarter). Ten properties with net sales proceeds of $90.5 million were
contributed to unconsolidated property funds in which ProLogis maintains an
ownership interest. Also, ProLogis recognized a net gain of $0.5 million upon
the contribution of its 49.9% ownership of ProLogis European Properties S.a.r.l.
to ProLogis European Properties Fund in January 2001.

Loss from Unconsolidated Entities

The net loss from unconsolidated entities, recognized under the equity
method, that is not directly attributable to one of ProLogis' three business
segments was $2,069,000 and $3,912,000 for the six months ended June 30, 2002
and 2001, respectively. See Note 7 to ProLogis' Consolidated Condensed Financial
Statements in Item 1. For 2002, this amount consists of: (i) a $2,073,000 loss
from ProLogis' investment in GoProLogis and (ii) income of $4,000 from ProLogis'
investment in Insight, Inc. The loss recognized by GoProLogis represents
ProLogis' share of GoProLogis' impairment adjustment that reduced GoProLogis'
remaining investment in Vizional Technologies to zero. For 2001, this amount
consists of: (i) income of $3,042,000 from ProLogis' investment in GoProLogis
(ii) a loss of $10,000 from ProLogis' investment in Insight, Inc. (iii) a loss
of $155,000 from ProLogis' investment in ProLogis Equipment Services and (iv) a
loss of $6,789,000 from ProLogis' investment in ProLogis Phatpipe. The income
recognized by GoProLogis consisted entirely of license fee income for the
non-exclusive use of the ProLogis Operating System(R) earned from Vizional
Technologies. The loss recognized by ProLogis PhatPipe consists of $667,000 of
license fee income for the non-exclusive use of the ProLogis Operating System(R)
earned from PhatPipe (all in the first quarter) offset by a $7,456,000 loss in
the second quarter, representing ProLogis' share of ProLogis Phatpipe's
impairment charge resulting from the write-down to zero of its preferred stock
investment in PhatPipe, Inc. ProLogis PhatPipe and GoProLogis ceased recognizing
income under their license fee agreements in the second and third quarters of
2001, respectively. See Note 3 to ProLogis' Consolidated Condensed Financial
Statements in Item 1.

Foreign Currency Exchange Gains (Losses), Net

ProLogis recognized net foreign currency exchange losses of $6.9 million and
net foreign currency exchange gains of $4.3 million during the six months ended
June 30, 2002 and 2001, respectively. Foreign currency gains and losses that are
recognized in results from operations are generally a function of movements in
exchange rates, the levels of intercompany and third party debt outstanding and
the currency in which such debt is denominated as compared to the functional
currency of the entities that are party to the debt agreements. Additionally,
ProLogis recognizes gains and losses from derivative financial instruments
utilized to manage its foreign currency exchange risks. The following table
summarizes ProLogis' foreign currency exchange gains and losses recognized in
results of operations for the periods presented (in thousands):

27

- ----------

(1) ProLogis and certain of its foreign consolidated subsidiaries have
intercompany or third party debt that is not denominated in that entity's
functional currency. When the debt is remeasured against the functional
currency of the entity, a gain or loss can result. The foreign currency
exchange loss for the six months ended June 30, 2002 is primarily the
result of the strengthening of the pound sterling against the euro (this
results in a loss on euro-functional companies when the debt is
denominated in pounds sterling) and the weakening of the Polish zloty
against the euro (this results in a loss on zloty-functional companies
when the debt is denominated in euros). The foreign currency exchange
gains recognized for the six months ended June 30, 2001 are the result of
the weakening of the pound sterling against the euro and the
strengthening of the Polish zloty against the euro in borrowing
situations similar to those in 2002 with respect to the placement of
intercompany and third party debt among ProLogis' consolidated
subsidiaries.

Income Taxes

ProLogis is taxed as a REIT for federal income tax purposes and is not
generally required to pay federal income taxes if minimum distribution and
income, asset and shareholder tests are met. Not all of ProLogis' consolidated
subsidiaries in the United States are qualified REIT subsidiaries for tax
purposes. Also, the foreign countries in which ProLogis operates do not
recognize REITs under their respective tax laws. Accordingly, ProLogis
recognizes income taxes as appropriate and in accordance with GAAP with respect
to the taxable earnings of certain of its taxable subsidiaries.

Current income tax expense recognized for the six months ended June 30, 2002
and 2001 was $3.5 million and $1.9 million, respectively. Current income tax
expense is generally a function of the level of income recognized by ProLogis'
taxable subsidiaries operating in the CDFS business segment. ProLogis recognized
deferred income tax expense of $12.3 million for the six months ended June 30,
2002 and $4.3 million for the six months ended June 30, 2001. ProLogis' deferred
income tax component of total income taxes is a function of the period's
temporary differences (items that are treated differently for tax purposes than
for book purposes) and the utilization of previously generated tax net operating
losses that have been previously recognized as deferred tax assets.

Three Months Ended June 30, 2002 and 2001

The changes in net earnings attributable to Common Shares and its components
for the three months ended June 30, 2002 compared to the three months ended June
30, 2001 are similar to the changes for the six month periods ended on the same
dates and the three-month period changes are attributable to the same reasons
discussed previously except as specifically discussed under "-- Gains (Losses)
on Disposition of Real Estate, Net" and "--Loss from Unconsolidated Entities" .

ENVIRONMENTAL MATTERS

ProLogis has not experienced any environmental condition on its properties
that materially adversely affected its results of operations or financial
position nor is ProLogis aware of any environmental liability that ProLogis
believes would have a material adverse effect on its business, financial
condition or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Overview

ProLogis considers its liquidity and ability to generate cash from
operations as well as its financing capabilities (including proceeds from the
disposition of distribution properties) to be adequate and expects it to
continue to be

28

adequate to meet its anticipated development, acquisition, operating and debt
service needs as well as its shareholder distribution requirements.

ProLogis' future investing activities are expected to consist primarily of
the acquisition of land for future development and the development of
distribution properties in the CDFS business segment for future disposition, as
well as, but to a lesser extent, acquisitions of existing distribution
properties in key distribution markets in the property operations segment.
Additionally, ProLogis has a Common Share repurchase program under which it may
repurchase additional Common Shares. ProLogis may repurchase an additional $61.7
million of Common Shares under this program. ProLogis expects to fund these
future cash needs with:

o cash generated by operations;

o the proceeds from the disposition of properties developed by ProLogis to
third parties;

o the proceeds from the contribution of properties to unconsolidated
property funds in which ProLogis maintains an ownership interest;

o utilization of ProLogis' U.S. dollar denominated and multi-currency
denominated lines of credit; and

o the proceeds from the sale of Common Shares under ProLogis' Common Share
plans.

Should the sale of substantially all of CSI's operating assets be completed,
ProLogis would have access to additional cash after third party debt of
approximately $90.0 million is repaid. However, there can be no assurance that
such sale will occur.

In the short-term, borrowings on and subsequent repayments of, ProLogis'
line of credit are expected to provide ProLogis with adequate liquidity and
financial flexibility to efficiently respond to market opportunities. With
approximately $1,079.3 billion of total short-term borrowing capacity as of
August 8, 2002, ProLogis' combined outstanding borrowings of approximately
$455.3 million as of that date results in short-term borrowing capacity
available to ProLogis of approximately $624.0 million (see "-- Borrowing
Capacity and Debt Maturities").

ProLogis has $608.0 million of shelf-registered securities which can be
issued in the form of debt securities, preferred shares, Common Shares, rights
to purchase Common Shares and preferred share purchase rights on an as-needed
basis, subject to ProLogis' ability to effect an offering on satisfactory terms.
ProLogis continues to evaluate the public debt markets with the objective of
reducing its short-term borrowings, when it is deemed appropriate.

Within ProLogis European Properties Fund, ProLogis has access to 181.7
million euros (the currency equivalent of approximately $181.1 million as of
June 30, 2002) of additional third party equity capital commitments in Europe,
through September 15, 2002. ProLogis European Properties Fund expects these
commitments to be funded in their entirety by that date. ProLogis European
Properties Fund intends to use this capital to acquire ProLogis' completed
stabilized European development properties that are expected to be available for
contribution in the third and fourth quarters of 2002. ProLogis European
Properties Fund had two lines of credit available to it as of June 30, 2002,
however, one facility was repaid at maturity in July 2002 (approximately $22.7
million outstanding as of June 30, 2002) and the second facility is due in
October 2002 (approximately $22.0 million outstanding as of June 30, 2002).
ProLogis European Properties Fund is currently negotiating additional borrowing
arrangements with third parties. While there can be no assurance that these
negotiations will be successful, ProLogis European Properties Fund expects that
it will have sufficient borrowing capacity in place such that it will be able to
acquire all of the completed stabilized European development properties that
ProLogis expects to have available for contribution in the first quarter of
2003. ProLogis European Properties Fund believes that its efforts to obtain
additional equity subscriptions will be successful, however there can be no
assurance that ProLogis European Properties Fund will obtain additional capital
commitments such that it will be able to acquire ProLogis' completed
developments that are expected to be available past the first quarter of 2003.

The Japan property fund can provide ProLogis with access to $300.0 million
of additional third party equity capital that has been committed by GIC through
June 2006. The capital is committed to fund the acquisition of ProLogis'
completed stabilized developments in Japan as well as for acquisitions of
properties from third parties, subject to ProLogis' ability to acquire land for
development and the properties' meeting specified criteria.

29

Cash From Operating, Investing and Financing Activities

Net cash provided by operating activities was $161.2 million for the six months
ended June 30, 2002 and $189.2 million for the six months ended June 30, 2001
and cash provided by operating activities exceeded the cash distributions paid
on Common Shares and cash dividends paid on preferred shares for both periods in
2002 and 2001. The decrease in net cash provided by operating activities for the
six months ended June 30, 2002 from the same period in 2001 results primarily
from changes in working capital.

ProLogis' investing activities were self-funded for both the six months
ended June 30, 2002 and 2001 (generating net cash of $29.2 million in 2002 and
$234.8 million in 2001) as a result of the volume of property dispositions,
primarily from the CDFS business segment. Also in 2001, ProLogis received net
cash of $170.2 million from its unconsolidated entities. This cash was generally
received as repayment of intercompany balances and in payment of distributions
owed to ProLogis, net of additional equity investments in these entities. During
this period, ProLogis Logistics borrowed $125.0 million directly on ProLogis'
line of credit with the proceeds being used to repay amounts due to ProLogis.

ProLogis generated cash in both six-month periods from the sale of Common
Shares under its dividend reinvestment and optional share purchase plans. The
proceeds from these sales along with the excess cash generated from operating
activities (net of amounts utilized for dividend and distribution payments) and
investing activities were used to repay short-term borrowings, repurchase Common
Shares, meet debt requirements and, in 2001, redeem $139.6 million of preferred
shares.

See ProLogis' Consolidated Condensed Statements of Cash Flows in Item 1.

Borrowing Capacity and Debt Maturities

ProLogis has $1.1 billion of short-term borrowing capacity under four
revolving lines of credit. These borrowings are available in four currencies and
are summarized below (dollar amounts in millions of U.S. dollars):

- ----------

(1) Represents the weighted average interest rate on borrowings outstanding as
of June 30, 2002.

(2) Credit agreement may be extended from this date for one year at ProLogis'
option.

(3) Borrowings can be denominated in U.S. dollars, euros, pounds sterling or
yen.

(4) Borrowings can be denominated in either euros or pounds sterling (total
commitment is 325.0 million euros). Outstanding balance includes the
currency equivalent of approximately $31.4 million of direct borrowings by
Kingspark S.A. under ProLogis' line of credit as of June 30, 2002. ProLogis
has guaranteed these borrowings. As of August 8, 2002, the currency
equivalent of approximately $42.8 million was borrowed directly by Kingspark
S.A., all of which were guaranteed by ProLogis.

(5) Borrowings are denominated in yen (total commitment is 24.5 billion yen).
Both the June 30, 2002 and August 8, 2002 amounts outstanding represent the
U.S dollar equivalent of 7.1 billion yen.

(6) Available borrowings as of June 30, 2002 and August 8, 2002, are reduced by
$6.2 million and $4.5 million of letters of credit outstanding,
respectively.

30

ProLogis has senior unsecured notes and secured debt (mortgage notes,
assessment bonds and securitized debt) outstanding as of June 30, 2002 with
annual principal payments during each of the years in the five-year period
ending December 31, 2006 and thereafter as follows (in thousands):

Remainder of 2002............... $ 4,720
2003............................ 185,127
2004............................ 316,566
2005............................ 110,842
2006............................ 319,996
2007 and thereafter............. 1,222,063
-------------
Total principal due... 2,159,314
Less: Original issue discount... (1,961)
-------------
Total carrying value.. $ 2,157,353
=============

Liquidity and Capital Resources of ProLogis' Unconsolidated Entities

ProLogis has investments and advances to unconsolidated entities of $1.5
billion as of June 30, 2002. Summarized balance sheet information for certain of
these unconsolidated entities is presented below (in millions of U.S. dollars).
The information presented is for the entire entity.

- ----------

(1) ProLogis had an ownership interest in excess of 99% in each entity as of
June 30, 2002.

(2) ProLogis had a 50% ownership interest in this entity as of June 30, 2002.

(3) ProLogis had a 41.3% ownership interest in this entity as of June 30, 2002.

(4) ProLogis had a 20% ownership interest in each entity as of June 30, 2002.

(5) ProLogis had a 16.9% ownership interest in this entity as of June 30, 2002.

(6) ProLogis had a 31.7% ownership interest in this entity as of June 30, 2002.

(7) Includes amount due from ProLogis of $0.2 million.

(8) Total liabilities of ProLogis Logistics include amounts due to ProLogis and
loans from third parties in the following amounts:

o $12.0 million due to ProLogis;

o $90.0 million due to a third party; due in June 2003; all of which has
been guaranteed by ProLogis; and

o $2.5 million of other third party debt; none of which has been
guaranteed by ProLogis.

(9) Total liabilities of Frigoscandia S.A. include amounts due to ProLogis and
loans from third parties in the following amounts:

o $291.9 million due to ProLogis and

o $0.4 million of other third party debt; none of which has been
guaranteed by ProLogis.

(10) Total liabilities of ProLogis California include amounts due to ProLogis
and loans from third parties in the following amounts:

31

o $0.2 million due to ProLogis;

o $17.2 million due to a third party; due in May 2005; none of which has
been guaranteed by ProLogis;

o $181.3 million due to a third party; due in March 2009; none of which
has been guaranteed by ProLogis; and

o $93.8 million due to a third party; due in August 2009; none of which
has been guaranteed by ProLogis.

(11) Total liabilities of ProLogis North American Properties Fund I include
loans from third parties in the following amounts:

o $130.6 million due to a third party; due in December 2010; none of
which has been guaranteed by ProLogis and

o $102.0 million due to a third party; due in March 2011; none of which
has been guaranteed by ProLogis.

(12) Total liabilities of ProLogis North American Properties Fund II include
amounts due to ProLogis and loans from third parties in the following
amounts:

o $0.1 million due to ProLogis and

o $165.0 million due to a third party; due in June 2007; none of which
has been guaranteed by ProLogis.

(13) Total liabilities of ProLogis North American Properties Fund III include
amounts due to ProLogis and loans from third parties in the following
amounts:

o $0.1 million due to ProLogis;

o $150.0 million due to a third party; due in September 2007; none of
which has been guaranteed by ProLogis; and

o $0.3 million of other third party debt; none of which has been
guaranteed by ProLogis.

(14) Total liabilities of ProLogis North American Properties Fund IV include
loans from third parties in the following amounts:

o $103.0 million due to a third party; due in January 2008; none of
which has been guaranteed by ProLogis and

o $0.2 million of other third party debt; none of which has been
guaranteed by ProLogis.

(15) Total liabilities of ProLogis North American Properties Fund V include
amounts due to ProLogis and loans from third parties in the following
amounts:

o $1.5 million due to ProLogis and

o $173.0 million due to a third party; due in July, 2007; none of which
has been guaranteed by ProLogis.

(16) Total liabilities of ProLogis European Properties Fund include amounts due
to ProLogis and loans from third parties in the following amounts:

o $2.6 million due to ProLogis;

o $22.7 million due to a third party; due in July 2002; none of which
has been guaranteed by ProLogis;

o $22.0 million due to a third party; due in October 2002; none of which
has been guaranteed by ProLogis;

o $207.5 million due to a third party; due in May 2008; none of which
has been guaranteed by ProLogis;

32

o $139.8 million due to a third party; due in April 2009; none of which
has been guaranteed by ProLogis;

o $345.6 million due to a third party; due in May 2009; none of which
has been guaranteed by ProLogis; and

o $24.6 million (five mortgage issues) due to third parties; due in
March 2015; none of which has been guaranteed by ProLogis.

(17) Liabilities include $422.4 million due to ProLogis and $31.4 million that
has been borrowed under ProLogis' line of credit and guaranteed by
ProLogis. Additionally, ProLogis has guaranteed a 25.0 million pound
sterling (the currency equivalent of approximately $38.3 million as of June
30, 2002) line of credit to ProLogis Kingspark. As of June 30, 2002, there
were no borrowings outstanding on this line of credit. However, as of June
30, 2002, ProLogis Kingspark had the currency equivalent of approximately
$8.3 million of letters of credit outstanding that reduce the amount of
borrowings available to ProLogis Kingspark on the line of credit.

(18) ProLogis has entered into a subscription agreement to make additional
capital contributions of 25.1 million euros (the currency equivalent of
approximately $25.0 million as of June 30, 2002) by September 15, 2002.

Distribution and Dividend Requirements

ProLogis' current distribution policy is to pay quarterly distributions to
shareholders based upon what it considers to be a reasonable percentage of cash
flow and at the level that will allow ProLogis to continue to qualify as a REIT
for tax purposes. Because depreciation is a non-cash expense, cash flow
typically will be greater than earnings from operations and net earnings.
Therefore, annual distributions are expected to be consistently higher than
annual earnings.

On February 28, 2002 and May 29, 2002, ProLogis paid quarterly distributions
of $0.355 per Common Share to shareholders of record on February 14, 2002 and
May 15, 2002, respectively. The Board set the 2002 distribution level in
December 2001 at $1.42 per Common Share. The payment of distributions is subject
to the discretion of the Board and is dependent upon the financial condition and
operating results of ProLogis and may be adjusted at the discretion of the Board
during the year.

As of June 30, 2002, ProLogis had three series of cumulative redeemable
preferred shares of beneficial interest outstanding. The annual dividend rates
on ProLogis' cumulative redeemable preferred shares are $4.27 per share (Series
C), $1.98 per share (Series D) and $2.19 per share (Series E).

On January 31, 2002 and April 30, 2002, ProLogis paid quarterly dividends of
$0.5469 per share (Series E). On March 29, 2002 and June 28, 2002, ProLogis paid
quarterly dividends of $1.0675 per share (Series C) and $0.495 per share (Series
D).

Pursuant to the terms of its preferred shares, ProLogis is restricted from
declaring or paying any distribution with respect to the Common Shares unless
and until all cumulative dividends with respect to the Preferred Shares have
been paid and sufficient funds have been set aside for dividends for the then
current dividend period with respect to the preferred shares.

Other Commitments

As of June 30, 2002, ProLogis had letters of intent or contingent contracts,
subject to ProLogis' final due diligence, for the acquisition of 2.7 million
square feet of distribution properties at an estimated acquisition cost of $95.9
million. The foregoing transactions are subject to a number of conditions, and
ProLogis cannot predict with certainty that they will be consummated. As of June
30, 2002, ProLogis had $36.3 million of funds on deposit with title companies
that can be used to acquire these assets. In addition, as of June 30, 2002,
ProLogis had properties under development with an expected cost at completion of
$352.5 million of which $190.9 million was unfunded. As of June 30, 2002,
Kingspark S.A. had properties under development with an expected cost at
completion of approximately $125.2 million of which approximately $62.8 million
was unfunded.

ProLogis has a Common Share repurchase program under which it may repurchase
up to $120.0 million of its Common Shares. The Common Shares have been and, to
the extent these repurchases continue, will be purchased in the open market and
in privately negotiated transactions, depending on market prices and other
conditions. As of

33

June 30, 2002, ProLogis has repurchased a total of 2,527,000 Common Shares under
this program at a total cost of $58.3 million resulting in an additional $61.7
million of Common Shares that may be repurchased under the program. ProLogis
intends to fund the Common Share repurchase program with cash generated from
operations and borrowings on its lines of credit.

FUNDS FROM OPERATIONS

Funds from operations attributable to Common Shares increased by $18.6
million to $214.7 million for the six months ended June 30, 2002 from $196.1
million for the six months ended June 30, 2001.

Funds from operations does not represent net income or cash from operating
activities in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs, which is presented in the Consolidated Condensed
Statement of Cash Flows in ProLogis' Consolidated Condensed Financial Statements
in Item 1. Funds from operations should not be considered as an alternative to
net income as an indicator of ProLogis' operating performance or as an
alternative to cash flows from operating, investing or financing activities as a
measure of liquidity. Additionally, the funds from operations measure presented
by ProLogis will not necessarily be comparable to similarly titled measures of
other REITs. ProLogis considers funds from operations to be a useful
supplemental measure of comparative period operating performance and as a
supplemental measure to provide management, financial analysts, potential
investors and shareholders with an indication of ProLogis' ability to fund its
capital expenditures and investment activities and to fund other cash needs.

Funds from operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") generally as net income (computed in accordance
with GAAP), excluding real estate related depreciation and amortization, gains
and losses from sales of properties, except those gains and losses from sales of
properties upon completion or stabilization under pre-sale agreements and after
adjustments for unconsolidated entities to reflect their funds from operations
on the same basis. ProLogis includes gains and losses from the disposition of
its CDFS business segment assets in funds from operations (see "--Results of
Operations--CDFS Business").

Funds from operations, as used by ProLogis, is modified from the NAREIT
definition. ProLogis' funds from operations measure does not include: (i)
deferred income tax benefits and deferred income tax expenses of ProLogis'
taxable subsidiaries; (ii) foreign currency exchange gains and losses resulting
from debt transactions between ProLogis and its foreign consolidated entities;
(iii) foreign currency exchange gains and losses resulting from debt
transactions between ProLogis and its foreign unconsolidated entities; (iv)
foreign currency exchange gains and losses from the remeasurement (based on
current foreign currency exchange rates) of certain third party debt of
ProLogis' foreign consolidated entities; and (v) mark-to-market adjustments
related to derivative financial instruments utilized to manage ProLogis' foreign
currency risks. These adjustments to the NAREIT definition are made to reflect
ProLogis' funds from operations on a comparable basis with the other REITs that
do not engage in the same types of transactions that give rise to these items
with respect to ProLogis.

Funds from operations is as follows (in thousands):

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2002, no significant change had occurred in ProLogis'
interest rate risk or foreign currency risk as discussed in ProLogis' 2001
Annual Report on Form 10-K, as amended.

35

PART II

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS

At the meeting on June 12, 2002, the shareholders of ProLogis elected the
following Trustees to office (of the total 177,494,391 Common Shares outstanding
on the record date of April 3, 2002, 159,947,754 Common Shares were voted at the
meeting):

o 158,209,946 Common Shares were voted for the election of Mr. K. Dane
Brooksher as Class III Trustee to serve until the annual meeting of
shareholders in the year 2005, 1,737,808 Common Shares withheld;

o 159,494,304 Common Shares were voted for the election of Mr. Kenneth
N. Stensby as Class III Trustee to serve until the annual meeting of
shareholders in the year 2005, 453,450 Common Shares withheld;

o 159,506,986 Common Shares were voted for the election of Mr. George L.
Fotiades as Class I Trustee to serve until the annual meeting of
shareholders in the year 2003, 440,768 Common Shares withheld;

o 159,492,032 Common Shares were voted for the election of Mr. William
D. Zollars as Class I Trustee to serve until the annual meeting of
shareholders in the year 2003, 455,722 Common Shares withheld;

Mr. Thomas G. Wattles, a Class III Trustee was standing for re-election at
the June 12, 2002 meeting of shareholders. However, Mr. Wattles resigned his
position as Trustee in May 2002. In accordance with its discretionary authority,
the Board elected Ms. Neelie Kroes as the replacement nominee for Mr. Wattles.
The Common Shares represented by the proxy to be voted for Mr. Wattles were
therefore voted for Ms. Kroes (152,201,300 Common Shares were voted for the
election of Ms. Kroes, 7,746,454 Common Shares withheld). Ms. Kroes will serve
as a Class III Trustee until the annual meeting of shareholders in the year
2005.

In addition, at the June 12, 2002 meeting, ProLogis' shareholders approved
an amendment to the ProLogis 1997 Long-Term Incentive Plan to increase the
number of Common Shares available for award by 8,000,000 to a total of
22,600,000. There were 142,192,871 Common Shares in favor, 17,628,637 against,
126,241 abstaining from the proposal and 5 Broker non-votes.

Also at this meeting, ProLogis' shareholders did not approve the
shareholder proposal to urge the Board to take measures necessary to change the
jurisdiction of incorporation of ProLogis from the State of Maryland to the
State of Delaware. There were 108,311,720 Common Shares against, 42,880,717 in
favor, 1,483,150 abstaining and 7,272,167 shares not voted on this proposal.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

12.1 Computation of Ratio of Earnings to Fixed Charges

12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends

15.1 Letter from KPMG LLP regarding unaudited financial information dated
August 12, 2002

(b) Reports on Form 8-K:

36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PROLOGIS

By: /s/ WALTER C. RAKOWICH
------------------------------------
Walter C. Rakowich
Managing Director and
Chief Financial Officer
(Principal Financial Officer)

By: /s/ LUKE A. LANDS
------------------------------------
Luke A. Lands
Senior Vice President and Controller

By: /s/ SHARI J. JONES
-------------------------------------
Shari J. Jones
Vice President
(Principal Accounting Officer)

Date: August 14, 2002

37

EXHIBIT INDEX